'Great way’ to reduce income tax explained – are you able to save £15,084 in tax?

HomeBusiness

'Great way’ to reduce income tax explained – are you able to save £15,084 in tax?

People can get 60 percent tax relief if their adjusted net income is between £100,000 and £125,140. Adjusted net income is one’s total taxable inco

EU Summit LIVE: 'Great hypocrisy!' VDL savaged for failing to break deadlock on Russia
Prince Harry plays polo in California with 'pure machismo' body language – 'great to see'
Prince Charles' slimmed down monarchy presents 'great risks': 'Spread more thinly'


People can get 60 percent tax relief if their adjusted net income is between £100,000 and £125,140. Adjusted net income is one’s total taxable income before any personal allowances and net of certain tax reliefs.These tax reliefs include trading loses, charitable donations made through gift aid, pension contributions paid before tax relief and pension contributions where someone’s pension provider has already given you tax relief at the basic rate.

Making additional pension contributions as people approach the end of the tax year when they may have more clarity about their exact income can be a “great way” to maximise the use of income tax allowances and exemptions.

On his YouTube channel, certified financial planner Justin King discussed how people earning within this bracket can receive this 60 percent tax relief and offered insight for those who are thinking about making additional pension contributions.

He said: “It’s even better if you know what your adjusted net income is going to be at the start of the tax year on the April 6 so you can plan ahead and take advantage of this legitimate tax break.

“The reason some people are able to get 60 percent tax relief on their pension contributions is due to the reduction in the personal allowance that is made once your adjusted net income exceeds £100,000.”

READ MORE: ‘Thievery at highest order!’ Eamonn Holmes erupts at National Insurance changes

Everyone has a personal allowance of £12,570 per tax year.

This is the amount people can earn without paying income tax. The personal allowance is frozen at this level until April 2026.

For every £2 that someone’s adjusted net income exceeds £100,000, their personal allowance is reduced by £1.

As the personal allowance is currently £12,570, the full personal allowance would have been completely wiped out when someone’s income reaches £125,140.

DON’T MISS

He gave an example.

If someone earns £125,140 – the top end of the income bracket – then at this level, they have lost their personal allowance, so they can’t earn any money free from income tax.

He explained that they will pay basic rate income tax of 20 percent on £37,000 of their salary which equates to £7,540. They will then pay 40 percent on the rest of their salary.

That’s another £34,976. The total income tax paid is £42,560.

If people then make gross pension contributions of £25,140, this will reduce their gross salary back down to £100,000.

They will then get back their personal allowance – so they can earn £12,570 free of income tax.

Britons will still pay basic rate tax of 20 percent on the £37,700 which gives the same figure of £7,540, but they will then pay 40 percent income tax on a much smaller amount of their gross salary – £49,740 instead of £87,440.

This will give a total income tax bill of £27,432.

Mr King concluded: “Without a pension contribution, you will pay £42,516 in income tax, but making a pension contribution can reduce your tax bill to £27,432.

“That’s a reduction of £15,084 in the income tax paid which as a percentage of your pension contributions is 60 percent.

“This is how to get 60 percent tax relief on pension contributions if your adjusted net income is between £100,000 and £125,140.”



COMMENTS

WORDPRESS: 0
DISQUS: 0